Diversification versus Focus for Businesses

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A few short decades ago, the big thing in the corporate world was "diversification". Companies would look to expand their businesses beyond the core commercial areas in which they got started, into both related and unrelated spaces.

The logic was that by diversifying from their core business, especially into unrelated areas, they would be protecting the organization from the vagaries of any single market. If the economic headwinds in one area turned against it, then another diversified area would act as a counter, protecting overall revenues and hence profitability.

Many big companies bought into this belief. Coca Cola moved into the wine business in the 80s. Cosmopolitan (the magazine publisher) introduced its own yoghurt and soft cheese in the 90s.

However, save for very, very few companies, diversification in business doesn't work.

Companies can only be good at one thing. One core business area that they can galvanize around, build skills for and focus the company. What you are really good at becomes part of your DNA.

Just one thing.

Yes, big companies have more resources to play with this concept, but it doesn't mean they will be successful. Furthermore, the real question to be asked is, what is success - is it simply being a participant in the new market that delivers moderate profitability? Or is success being a leader in that market?

I firmly believe that management bandwidth - the ability for a management team to give adequate time and attention to any given business - has limits. Beyond a point, they're compromising. They're giving in to a false belief in security, balance and de-risking.

Sure, you can leverage your core into fundamentally related areas. But again, only to a point, before the core business begins to suffer.

Management attention and bandwidth is as important as (if not more than) having the required resources. 

Peters and Waterman had it right all those years ago.

Stick to your knitting.